16

FINDING

BALANCEMeeting the Financial Needs of Multiple Generations

A challenging economic environment, continuing uncertainties about the future of Social Security income, and the dwindling number

of employers offering pension benefits are just a few factors contributing to an increase in financial pressure in the

U.S. today. Combine these elements with longer life spans and the rising cost of health care and education, among other trends, and you have the foundation for the “Sandwich Generation,” a growing number of people who

find themselves trying to ensure their own financial security while at the same time providing for

their children and aging parents.

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A challenging economic environment, continuing uncertainties about the future of Social Security income, and the dwindling number

of employers offering pension benefits are just a few factors contributing to an increase in financial pressure in the

U.S. today. Combine these elements with longer life spans and the rising cost of health care and education, among other trends, and you have the foundation for the “Sandwich Generation,” a growing number of people who

find themselves trying to ensure their own financial security while at the same time providing for

their children and aging parents.

17

I f this sounds familiar to you, organizing your finan-cial information and identifying and anticipating expenses can help you to take appropriate action

to maximize the assistance you can offer. “Your resources ultimately are limited,” says Judith Ward, CFP®, a senior financial planner with T. Rowe Price, “so clearly outlining your family’s situation and keeping the lines of communi-cation open will enable you to determine the best use of your time and assets. Remember to first focus on your own state of affairs, keeping in mind that you can only assist others when you are on solid footing yourself.”

STARTING WITH YOURSELF Begin by creating a realistic budget (if you haven’t already) that incorporates your investment strategy, including a plan for the unexpected. Start by fully funding a house-hold emergency account. “If you face an unanticipated expense—a major car repair, for example, or a loss of income—an emergency fund will be there for mortgage and other expenses so you won’t have to use a credit card or tap into your retirement accounts,” explains Ward. “The most critical goal is to avoid creating and carrying high-interest debt.”

Since it’s quite possible that you could spend 30 years or more in retirement, investing enough to support yourself comfortably should take priority over all other financial objectives. “Not preparing adequately for your future,” Ward cautions, “means you could have to compromise your lifestyle when you leave the work force—potentially to the point where your children might have to provide care and financial assistance to you decades from now.”

Maximize Your InvestmentsAs a general rule, you should plan to replace around 75% of your prere-tirement income in order to maintain your current lifestyle in retirement. “Some of your retirement income may come from Social Security ben-efits, pensions, or other sources,” says Ward, “so, for rough calculation purposes, your retirement invest-ments should cover about 50% of your preretirement income.”

If you aren’t doing so already, try to maximize your tax-advantaged retirement accounts. Your goal should be to invest 15% of your gross salary

in either a company-sponsored retirement plan such as a 401(k), an individual retirement account (IRA), or a combination of accounts. This amount includes any company contributions, so if your employer matches 100% of the first 3% that you save, you would only have to set aside 12% of your salary to reach the 15% goal. (See Digging Deeper on page 8 to read about the importance of tax diversification in your retirement accounts.)

In addition to potential tax-advantaged compound-ing, most retirement accounts have another benefit: They allow you to follow a systematic investing strat-egy. That means investing consistent dollar amounts at regular intervals. Systematic investing ensures that you continue to contribute to your retirement plans, regardless of other competing demands. Bear in mind, however, that systematic investing cannot assure a profit or protect against loss in a declining market.

PROVIDING FOR YOUR PARENTSOnce you have your retirement strategy in place, you can decide where to focus your attention next. “In many cases,” Ward points out, “your parents may be beyond their earning years. So even if they are still active and independent, identifying your parents’ expectations and determining how they’re positioned for the future will

provide you with a clearer idea of how you can best assist them.”

Offering AssistanceIn talking with your parents, make sure to include appropriate family members so that you can share the commitment of time and expenses. You’ll want to gather information about your parents’ overall financial situation: Begin by asking them questions about the assets they currently own, such as retirement and pension plans, Social Security income, and insurance policies, and imag-ine how this picture would look should one parent pass away.

Another valuable step: Find out what your parents’ health insur-ance will pay for and consider what their potential long-term care expenses may be. Bear in mind that neither Medicare nor Medigap policies cover the cost of long-term custodial care. Long-term

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Visit theVisit the T. Rowe Price Retirement T. Rowe Price RetirementIncome Calculator Income Calculator atat troweprice.com/rictroweprice.com/ric..

TheThe Retirement Readiness GuideRetirement Readiness Guide offersofferstools and strategies to help you prepare tools and strategies to help you preparefor and create a smooth transition into for and create a smooth transition intoretirement. Callretirement. Call 1-800-401-18191-800-401-1819 totorequest a copy of the guide or visitrequest a copy of the guide or visittroweprice.com/retirementplanningtroweprice.com/retirementplanning..

T. Rowe Price’s IRA AutoMaxT. Rowe Price’s IRA AutoMax service serviceallows you to make periodic contributionsallows you to make periodic contributionsthroughout the year to maximize your IRA. throughout the year to maximize your IRA.Sign up atSign up at troweprice.com/automaxtroweprice.com/automax..

TheThe Eldercare LocatorEldercare Locator—a public service—a public serviceof the U.S. Administration on Aging—canof the U.S. Administration on Aging—canhelp you locate local resources for older help you locate local resources for olderadults in any U.S. community. Visitadults in any U.S. community. Visitwww.eldercare.govwww.eldercare.gov for more information.for more information.

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care insurance can cover some of these expenses. “Helping your parents pay the premiums of a long-term care policy may be a good idea,” Ward notes, “because it could prevent you from having to pay the full cost of their care later on.”

Ward also suggests keeping track of your parents’ records—documents related to banking, investing, insur-ance, health, and estate planning—and contact information for their doctors, accountants, and financial advisors. “If for some reason one or both of your parents can no longer provide for themselves, consider establishing a durable power of attorney, which will give you the legal authority to act on their behalf.”

SUPPORTING YOUR CHILDRENThe nature of parenthood has changed over the decades, and older children—from recent graduates just entering the job market to those with years of work behind them—may be in need of continued financial assistance. According to a survey conducted by the Pew Research Center last October, about one in 10 adults between ages 18 and 34 has moved in with his or her parents. If you are continuing to support your grown children in some capacity, be sure to set expectations about how much you can continue to provide for them financially—or have them contribute if they’re living with you.

The rising cost of education makes it essential for those raising younger children to start saving early for college. Having funds already set aside when it comes time to pay a hefty tuition bill can eliminate or lower

any debt that you or your chil-dren might face later on. Talk to your children about the pos-sibility of their contributing to some of their college expenses, and explore other means of funding, such as grants, schol-arships, and various forms of financial aid.

Ward recommends that par-ents look first at a 529 college savings plan (see Saving for College With 529 Plans on page 19) or an Education Savings Account (ESA). Any growth in these accounts is tax-deferred, and withdrawals used to pay for qualified educational expenses are exempt from federal and, in some cases, state taxes.

KEEPING AN EYE ON YOUR FUTURE FIRSTNot surprisingly, balancing your

family’s changing financial situation may require some adjusting. Reevaluating your retirement goals is one option. If you can be flexible about when you retire, by postponing retirement for just a few years or working part time, you’ll have more time to add to your savings while reducing the amount you’ll have to withdraw over the long term.

Remember that your ability to assist other family mem-bers is dependent on your own financial position—and that no one but you can secure your retirement. With greater perspective on your family’s financial situation, you’ll be able to prioritize your saving and spending—bringing you closer to achieving your goals.

Tax Benefits for the Sandwich GenerationEXPENSES AND CREDITSA flexible spending account (FSA) through your employer allows you to set aside pretax

dollars for eldercare and childcare. If you paid someone to care for a dependent, you may be able to reduce your taxes by claiming credit for child and dependent care expenses on your federal income tax return.

TheThe T. Rowe Price Estate Planning GuideT. Rowe Price Estate Planning GuideEEwill teach you about the fundamentals ofwill teach you about the fundamentals ofttestate planning, including asset ownerestate planning, including asset owner--ship, tax issues, wills, and trusts. Visit ship, tax issues, wills, and trusts. Visittroweprice.com/estateplanningtroweprice.com/estateplanning totorequest a copy by mail or to download request a copy by mail or to downloadthe guide online.the guide online.

TheThe T. Rowe Price College Savings PlanT. Rowe Price College Savings Planis a national program with benefits foris a national program with benefits forparents anywhere in the U.S. In addition toparents anywhere in the U.S. In addition tothis plan, T. Rowe Price also manages two this plan, T. Rowe Price also manages twoother 529 plans—the Maryland Collegeother 529 plans—the Maryland CollegeInvestment Plan and the University of Investment Plan and the University ofAlaska College Savings Plan. For moreAlaska College Savings Plan. For moredetails on the features and benefits of details on the features and benefits ofeach plan, visiteach plan, visit troweprice.com/collegetroweprice.com/collegeor call or call 1-800-401-18191-800-401-1819 for additional for additionalinformation.information.

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EXEMPTIONSIf you are supporting your parents, you may be able to claim an added personal exemption on your income tax return. For 2010, you can reduce your taxable income by $3,650 for each exemption.

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CHECKLIST FOR THE SANDWICH GENERATION

FOR YOU FOR YOUR PARENTS FOR YOUR CHILDREN

Organize financial records Store your financial records (e.g., brokerage statements, retirement accounts, bank records, and insurance documents) in one place (hard copies and/or online) so you know where to find and reference them when needed.

Discuss their needs Gain a clear picture of what your parents’ needs are now and will be in the future (e.g., insurance, retirement, investments, and estate planning).

Establish access to important documents.

Empower them Teach your children about responsible money management.

Have dependent children take on financial responsibility through jobs and saving for specific goals.

Create a realistic budget Fund an emergency account. Reduce high-interest debt, where possible. Incorporate investing as a “fixed” expense. Identify areas where you might be able to save.

Consider long-term care insurance Look into insurance options that can cover the cost of nursing home or in-home care

Know that premiums are often lower for younger individuals, which is one reason why timing can be important when purchasing a policy.

Foster open dialogue Keep the lines of communication open and make sure your children understand the level of financial support you are willing to offer toward their goals and the types of responsibilities you expect from them.

Plan for retirement Contribute 15% of your gross income to your tax-deferred investment options (e.g., 401(k)s and Traditional IRAs) and your tax-free accounts (Roth IRAs).

Set up automatic contributions from your bank to your IRAs that continue until the maximum annual contribution amount allowed by the IRS is reached.

Rebalance your portfolio every year to restore your target investment mixes.

Seek out financial assistance Consult with financial planners, attorneys, and other professionals to help you work with your parents on financial matters.

Save for college (if appropriate) Consider competing demands for your money, and determine how much you can afford to support college education and other major expenses for your children.

Take advantage of the benefits of tax-deferred investing by opening a 529 plan account or an Education Savings Account (ESA) to help cover future college expenses.

Explore other means of funding, such as grants, scholarships, and various forms of financial aid.

Seek out financial assistanceConsult with financial planners, attorneys,and other professionals to help you workwith your parents on financial matters.

Saving for College With 529 PlansA 529 plan, one of the most common college savings options, is a tax-advantaged program—usually sponsored by a state—that can be used at nearly any U.S. college or graduate school. Although contributions aren’t federal income tax-deductible, they may be deductible at the state level. Also, your assets can grow tax-deferred, and

withdrawals are federal income tax-free when used for qualified educational expenses. With no income limitations, investors may con-tribute up to $320,000 per beneficiary, depending on the plan—a much higher amount than with other college savings vehicles.

There are some additional key benefits to contributing to a 529 plan. The account holder, not the beneficiary, controls the assets in the account and makes all decisions about how and when the money can be used. If the account holder needs the assets for another purpose, they may be withdrawn at any time, subject to tax on any earnings plus a 10% federal penalty (exceptions apply). Also, if the beneficiary does not go to college, the tax benefits may be preserved by changing the beneficiary to another member of the family.

Please note that the plan’s disclosure document includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. The availability of tax or other benefits may be conditioned on meeting certain requirements such as residency, purpose for or timing of distributions, or other factors, as applicable. State tax benefits are generally only available to residents of that state.

To learn more about 529 plans and to compare options, go to www.collegesavings.org or www.savingforcollege.com.